If you want a very short summary of yesterday’s budget, try two numbers at the back of budget paper 1. On the budget’s estimates, by 2020–21 today’s big deficit will have been turned into a slim budget surplus. To get there, spending will have been cut by just 0.1 per cent of gross domestic product while revenue will have shot up by 2.2 per cent of GDP.
It probably won’t happen; both numbers rest on optimistic assumptions. But they imply that if this budget works as intended, 95 per cent of the job of turning our deficit to surplus will be achieved by Australians paying higher taxes, and only 5 per cent by spending cuts.
And this is a Coalition budget.
Last night treasurer Scott Morrison delivered what he called a “practical” budget. It is quite different from anything the government has delivered since taking office in 2013, quite different from all but one of Peter Costello’s budgets – the one that introduced the GST – and quite different from the rhetoric the Coalition has poured out for more than a generation in support of cutting taxes and spending.
This budget raises taxes and spending. It aims to repair the budget balance in the medium term yet weaken it even further in the short term. It is not that different from the budget that shadow treasurer Chris Bowen sketched out during the election campaign.
Labor lite? Some in the Abbott camp would call it Labor heavy, a tax-and-spend budget. Politically, this is a seachange for Malcolm Turnbull and Scott Morrison. They have dumped the concerns of the right and headed out to plant the Liberal Party’s flag on the political middle ground, and take it back from Labor.
To me, it tells us that Turnbull is no longer worried about a threat to his leadership from Abbott. The enemy he is now focused on is Bill Shorten. And this politically bold budget has made giant strides in narrowing Shorten’s room to manoeuvre.
Is this a one-off shift, to break the impasse on reducing the budget deficit, with no wider consequences? Or is this, and the emergence last week of Gonski 2.0 to increase schools funding, a lasting change of tack? Is Malcolm Turnbull taking charge of his party, rather than letting it take charge of him, and steering it back to his natural habitat in the middle ground?
In economic terms, the budget is not perfect, but there are many good things. If you believe its numbers – and in some cases that’s challenging – it’s more of a tax, spend and save budget. In the next four years it aims to raise a net $20 billion of extra taxes, spend a net $14 billion of them, and put the other $6 billion towards reducing the budget deficit.
By and large, Morrison and his colleagues have chosen their tax victims with care. It will not be easy for Labor to fight the tax rises (although, seeing the outrage Bill Shorten and Tanya Plibersek are now voicing on behalf of overfunded Catholic schools, anything is possible). By and large, they have boosted spending in places where Australians want them to spend more – abandoning the harsh “zombie” spending cuts of Abbott’s 2014 budget. And by scrapping “savings” they could not deliver, and (at least notionally) keeping that $6 billion, they have improved their chances of finally getting the budget back into surplus.
The economics of this budget are not bad; the politics are quite extraordinary. Let’s start with that first.
Since he lost control of the tax reform debate at the start of last year, Malcolm Turnbull has appeared to be a prisoner of the Coalition’s conservative wing. He has backed away from positions he was previously identified with, on issues from tax reform to same sex marriage and climate change. As Abbott’s intention to take back the leadership became clearer, so did Turnbull’s retreat from his own views. On issue after issue, he seemed to be looking over his shoulder at his rival, asking, “What would Tony do?” and then doing it himself.
But the more Turnbull tried to please the Liberal right and the Nationals, the more he alienated mainstream Australia, those in the broad centre of public opinion. They have little interest in politics, but on many issues they hold the kind of views the right-wingers disparage as “Labor lite.” They want the budget deficit fixed, but not by harsh spending cuts like those proposed in the 2014 budget. They want their kids to go to well-funded schools. They want to have good hospitals there when they need them, they want good public transport as well as good roads, and they don’t see why the Coalition is holding up action on same sex marriage and climate change.
Abbott made no attempt to appeal to this broad centre, which was why he lost thirty Newspolls in a row. When Turnbull became PM, mainstream Australia greeted him as a saviour, but gradually soured on him as he failed to deliver. The only really significant reform Turnbull drove personally was the proposed refugee swap with the United States – but then ran into President Trump, with the result that, six months later, not one refugee has yet been freed.
The Coalition resumed its slide towards life in opposition. Since September it has lost eleven Newspolls in a row. It had reached that danger point where people were starting to switch off mentally, and stop listening to Turnbull. Unless he did something dramatic, or some rainbow of luck fell on him, it would soon be too late to revive his leadership – or the Coalition’s fortunes, since it had no other viable leader.
When the WA election ended in a thrashing for the Coalition, I argued that the 2017 budget was the Turnbull government’s opportunity to reboot, and reoccupy the political middle ground. I can’t claim any credit, but that is exactly what it did yesterday. In many ways, this was like an election budget, except that it hit enough revenue targets to let the government reduce its overdraft, rather than simply hand out more largesse.
Don’t underestimate this change. For years, Coalition treasurers and shadow treasurers have chanted the mantra “no new taxes.” In their policy decisions, the two parties repeatedly looked after the rich, and took money off the poor. Under the Howard government, the Bureau of Statistics estimates, the Gini coefficient, the measure of inequality, shot up from 0.29 to 0.34. Howard got away with it, because he was a masterly politician, and a lucky one. But that’s a rare combination.
The 2017 budget is quite the opposite. It plans to gradually withdraw money from overfunded schools, and distribute it where it is most needed. It puts a new tax on five big banks (the CBA, Westpac, ANZ, NAB and Macquarie, raising $6.2 billion over four years). It puts a new tax on employers who import skilled workers ($1.2 billion, earmarked for a fund to train Australians in skills), closes a loophole on rental investors claiming dodgy deductions ($800 million), and beefs up Tax Office resources to take on tax avoiders (hoping for $1 billion from the black economy and the Mafia, and another $1.6 billion from tax cheats in the building industry). Not too many votes lost there.
The banks of course will pass on the tax to their customers. Grattan Institute chief John Daley estimates that it could add an extra 0.03 or 0.04 per cent to mortgage interest rates. The government can’t stop them; Morrison’s only threat was to direct the overworked Australian Competition and Consumer Commission to investigate when they do so, and expose them for passing on a tax intended to be paid by their shareholders.
The tax is justified as an annual insurance premium for the implicit government guarantee of bank borrowing, which allows the banks to borrow money on global markets far more cheaply than otherwise. When Labor tried to impose a similar tax, at the urging of the Reserve Bank and other financial regulators, the Coalition blocked it in the Senate. How times change.
The biggest single revenue measure is an across-the-board tax on most of us: a further 0.5 per cent rise in the Medicare levy from 2019, in order to fund the unfunded half of the National Disability Insurance Scheme. I doubt that many Australians will complain about that. They want the NDIS in place, they know it has to be paid for, and the Medicare levy is a fair and appropriate way of doing it.
Yet you could not have imagined the government doing it a year ago, or imposing any of the other tax rises. It inherited a budget deficit of $37 billion, promptly blew it out to $48 billion with unfunded spending, and has reduced it only back to $38 billion for 2016–17. The Coalition’s first three years failed to reduce the deficit at all. Whatever it saved in spending cuts was immediately spent on other things, or given away in tax cuts. The budget is still spending $1.09 for every $1 of revenue it raises.
Morrison has again blamed the Senate for frustrating the spending cuts proposed in the 2014 budget – the 20 per cent cut in university funding, for instance, and making young people wait six months before going on the dole. In fact, those measures would have saved only $3 billion a year. The Senate has been used as a scapegoat for the government’s lack of fiscal discipline.
But on that front, Scott Morrison’s second budget has made three significant changes. First, if its numbers are right, its policy decisions will raise a net $6.25 billion – entirely between 2019 and 2021 – to reduce the deficit and then ensure a surplus. (The numbers are dodgy, though, because they assume a rapid rebound of wages growth from less than 2 per cent now to 3.75 per cent by 2020–21. Wages growth lifts income tax, which lifts the budget’s bottom line.)
Second, by committing the Coalition to raise taxes, Morrison has opened the way to finally getting the budget back under control, and not just promising to do it.
A relevant comparison: in the eight years after the Howard government introduced the GST, its revenues averaged 25.4 per cent of GDP and its spending 24.2 per cent. If these budget projections are right, by 2020–21 revenues will again be 25.4 per cent of GDP, and spending 25 per cent – of which roughly 1 per cent will be on the NDIS, which did not exist in Howard’s time.
Third, the budget abandons the remaining unpassed spending cuts from its first term in government. This worsens its bottom line by $13 billion over four years, but restores its honesty and credibility. Unfortunately, the budget also proposes new spending cuts that are unlikely to pass the Senate – its second attempt to squeeze billions of dollars from university students and new graduates is likely to die the same death as its first – but they are of a lesser order, and the bargaining on them has yet to begin.
The main spending cuts were flagged well in advance, with a bit of dissonance last week when, on successive days, education minister Simon Birmingham outlined big cuts to funding for the university sector – including a 5 per cent cut in university funding, and accelerated repayments by young graduates with HECS/HELP debts – followed by big increases in funding for schools.
Tertiary education is already Australia’s third-biggest export industry, and if nurtured well, it could provide a vital source of income for the nation for generations. Yet Birmingham was instructed to come up with savings as big as those the Senate has rejected since 2014. What is the benefit to Australia in cutting university budgets, or in creating disincentives for young people to study? I don’t get it, and I’d be surprised if the Senate does either.
The proposed freeze on family benefit payments, announced in March, continues a squeeze by governments of both sides, which is gradually turning family benefits from a near-universal right of parents into a welfare measure for the poor. I, for one, regret this. Children are the future of the country, and parents face high costs in raising them. The family benefit is a contribution made by society at large to those costs. A welfare system without universal benefits is one subject to perverse poverty traps, which reduce incentives to work. We should thoroughly debate this one.
Take away the decision to scrap the zombie spending cuts and, on paper, the rest of the budget’s new spending initiatives are roughly balanced out by spending cuts. In practice, the new spending is far more likely to get through the Senate than the cuts are. The cuts include the latest round of whack-the-unemployed, a new “three strikes” policy which would see repeat offenders lose half a payment the next time they breach the rules (such as missing an appointment), lose a full payment the time after that, and be thrown off all support for a month if they commit a third breach.
A second measure would allow welfare recipients to be put on the cashless debit card if they cite a drug episode or hangover as an excuse for missing an appointment. A third measure proposes a random trial in which 5000 young people on welfare would be tested for drug use, with a similar penalty if they test positive. Morrison told journalists this would help them get off welfare, since drug dependency is often a key factor keeping them out of work.
Other important spending measures include lifting the freeze on Medicare benefits, which was not going down well in the bush or in marginal seats. Some very expensive new drugs will be added to the pharmaceutical benefits scheme, and paid for by forcing manufacturers to reduce the price of older drugs. But how to restrain the growth in health costs is another issue we really need to debate.
There is no space here to debate the new school funding model, which has been well covered in Inside Story by Dean Ashenden and in the Financial Review by Tim Dodd.
Overall, this is a budget with more to applaud than oppose. But some of it is tricky, and nowhere more so than in one of its key selling points: infrastructure.
You’ve heard the sales pitch. More than $70 billion of investment in new roads, rail, airports and bridges over the eight years to 2020–21. The Commonwealth to build its own rival to Sydney airport out in Western Sydney, and fund road and rail links to it. A $10 billion National Rail Program to fund regional and urban rail improvements. A further $8.4 billion to build the Melbourne-to-Brisbane inland rail. $1 billion for Victoria, half of it pledged to regional rail. The Commonwealth to help fund the new Labor government’s Metronet scheme in Perth. There’s a lot happening here.
Morrison has talked up this sort of spending as “good debt,” an investment in the future which should be paid for largely by the future taxpayers who benefit from it. If well chosen, projects like these generate economic and social returns which more than cover their cost. Borrowing to build them is different from borrowing to pay for your current spending, which – apart from education spending – generates no such benefit in future.
I’m with him on that, and with Treasury when it argues in the budget papers that for the Commonwealth, even the net operating balance used by state governments as their budget bottom line doesn’t work. The money the Commonwealth gives the states to invest in road and rail appears in the budget as recurrent spending, not investment, because the Commonwealth is not doing investing itself. Take that out, Treasury says, and by 2018–19 the net operating balance – revenues minus recurrent spending – would be virtually back in balance, two years before the underlying cash balance gets there.
But there is no sign of this infrastructure spending binge in the budget papers. The two big projects – the Western Sydney airport and Inland Rail – are both being funded off-budget, like the National Broadband Network. The government will borrow up to $13.5 billion to invest in both projects as equity; but in the case of Inland Rail, it concedes that the project will still be in the red in fifty years’ time. Moving them both off-budget, but under Commonwealth ownership, means spending on them will not be counted in the budget’s bottom line.
The infrastructure spending recorded in the budget papers is set to fall, quite steeply, over the next four years: from $9.2 billion in 2017–18 to $5.1 billion in 2020–21. That might mean the government has decided its plans for next year, but not for four years’ time, which is fair enough; but if so, it means future spending growth might not be as restrained as the budget papers suggest – making the 2020–21 surplus less secure.
And when it comes to Victoria, the government is using theatrics to substitute for delivering the goods. The $1 billion infrastructure package in the budget is just an upgrade of the $877.4 million it has already offered Victoria in place of the $1.45 billion the state claims it is entitled to under the Commonwealth’s asset recycling initiative. It’s just prolonging the argument. Why not fix it?
On the data provided in the budget papers and ministerial statements, the Turnbull government plans to provide $3.9 billion in 2017–18 for transport infrastructure in the PM’s home state of New South Wales – $4.6 billion if you include a concessional loan to the WestConnex road project – yet just $796 million for Victoria. Victoria will get just 9 per cent of Turnbull government spending, New South Wales 45 per cent.
The funding for specific projects includes $1 billion for Sydney (excluding the WestConnex loan) but only $193 million for Melbourne. Of the $5.7 billion earmarked as grants for specific projects next year, 18 per cent will be invested in Sydney, and 3 per cent in Melbourne – which is taking almost a third of Australia’s population growth.
The Andrews government is difficult to deal with, but the Turnbull government shows no interest in reaching a solution. It acts like its priority is to look after New South Wales and Sydney. The PM’s claim last week that Victoria receives 20 per cent of road funding was false, and he surely knows that. Why allow this silly little parochial anti-Victorian bias to continue? Why not fix it, and move on to bigger issues?
Big issues are lying in wait. Yesterday’s budget papers barely mentioned climate change. But next month, chief scientist Alan Finkel will deliver his report on how Australia should meet its goal of reducing greenhouse gas emissions in 2030 by 26–28 per cent from 2005 levels. That’s a 50 per cent reduction in emissions per capita – whereas, on the government’s own estimates, our emissions have risen by almost 2 per cent since the carbon tax was scrapped in 2014.
The budget brought back the old Malcolm Turnbull. It’s a long time since we’ve seen him around climate change policy; that’s been handled by the other Malcolm, the one who looks like Tony Abbott. His government’s budget shows a sea change in priorities – but will that extend to other areas? Its response on climate change will tell us. •
